Exercise Set 8
INFLATION

I. Objectives

• To compute the inflation rate
• To understand who gains and who loses from inflation

II. Data

• Use the Consumer Price Index levels for two successive periods and compute the inflation rate.
• Click on Gimme Inflation! to verify your answer.

CPI in period 1:	CPI in period 2:		Inflation rate: %

III. Questions

1. From the BLS web site*:
   1. Obtain the CPI values for the following months (Use Consumer Price Index - All Urban Consumers, Not Seasonally Adjusted.)
      • Current month and year: __________     CPI: _________
      • Previous month and year: _________     CPI: _________
      • Month one year ago: _________     CPI: _________
   2. Compute the following:
   1. Percent change in the CPI in one month: _____________%. 
   2. Percent change in the CPI in one year: _____________%. (This is the annual rate of inflation.)
   3. The base period employed by the BLS for computing the CPI is _____________.
2. Changes in the CPI provide a measure of inflation in the economy. What are the shortcomings of this approach?
3. The govt. ties Social Security payments to the CPI in order to help maintain the purchasing power of the elderly. Some argue that this system is overly generous to the elderly, while others assert that tying Social Security to the CPI fails to adequately protect purchasing power. What are the arguments in this debate?
4. If inflation rises unexpectedly, the ones who stand to gain are [ lenders / borrowers ]. Explain.
5. If the nominal interest rate is 8% and the expected annual rate of inflation is 3%, the real interest rate will be ___________%. 
6. If the real interest rate remains constant, an increase of 3% in expected inflation will be accompanied by a [ 3% increase / 3% decrease ] in the nominal interest rate. Explain.
7. A sudden, unanticipated fall in inflation will leave bond holders [ better off / worse off ]. Explain.
8. Suppose nominal GDP grows by 4% in 2015.
1. What additional data do you need to compute the growth rate of  the economy's output of goods and services in 2015?
2. If real GDP grows by 3% in 2015, what can we conclude about inflation in 2015? Explain.

• In the first row [All Urban Consumers (Current Series)], click on Top Picks. 
• Select the first item [U.S. All items, 1982-84=100 - CUUR0000SA0]. 
• Click on Retrieve Data. 
• Use More Formatting Options on the right to select other options, including calculating one-month and 12-month percent changes.